The ASX stock market is a fantastic place to unlock an additional source of income for Australian investors. Dividends are a wonderful way to passively boost how much income an investor can make each year. Aussies can build up a significant level of annual dividends.
Job earnings are great, but there is an upper limit to how much we can work each week.
Investing in shares means having a small piece of ownership in businesses that are working hard to make profit. They can use some of that profit to fund growing dividends and invest for future growth.
Generating $50,000 of annual dividends won't be a quick result (unless you win the lottery). But, by starting now, investors can give themselves as much time as possible to benefit from compounding.
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Never underestimate compounding
By investing as little as $1,000 (or even less), investors can put money into shares and start seeing the passive income rolling in.
Let's say a business has a 4% dividend yield, and it grows its dividend by 10% per year. In the first year, if someone invested $1,000, it would pay $40 of annual dividends that we could add to our personal finance budget.
If the business hiked its dividend by 10%, in the second year the dividend payment would be $44.
Another 10% increase would make that amount $48.40 in the third year.
And so on.
In the 10th year, it would be $94.30 of annual dividends.
All of those above numbers are based on the investor only investing $1,000 once. It also assumes no re-investment of dividends into buying new shares.
Dividend re-investment plans (DRP) make it very easy to re-invest dividends into new shares for no transaction fees. This allows investors to significantly boost the growth of their divided income. Over a 10 year period, it would mean buying hundreds of dollars of more shares.
Invest regularly to reach $50,000 of annual dividends
By making regular contributions to our share portfolio, such as monthly or every two months, we can create that desired income.
For example, if someone invested $1,000 every month and it returned an average of 10% per year (the long-term ASX share market average return), that would turn into a portfolio worth more than $1.05 million. Depending on the dividend yield of a portfolio, that could allow investors to generate $50,000 of annual dividends.
I'm aiming to build that sort of financial picture for myself, though I'm still a long way from achieving it.
I am investing in ASX shares I believe can deliver strong total returns, including a good dividend yield. I can re-invest those dividends into buying more shares or spend that money – that's up to me as the months and years go by.
Some of my favourite ASX dividend stocks for this objective include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), MFF Capital Investments Ltd (ASX: MFF), L1 Long Short Fund Ltd (ASX: LSF), WCM Quality Global Growth Fund (ASX: WCMQ) and WCM Global Growth Ltd (ASX: WQG).
